5. Multinational corporations in the Central & Eastern Europe: A successful
5.1. Differences in fundamentals – the root causes standing behind the organizational
41
5. Multinational corporations in the Central & Eastern
42 that they may even threaten the entire business (e.g. Polish managers are not accepted in Ukraine)24.
Despite all the challenges, many MNCs already operate in the CEE region and a lot of them plan to enter or further expand their activities within the area. According to the survey25 of Boston Consulting Group, 75% of MNCs are going to increase their sales activities in the region, 44% of them plan to enlarge their sourcing and manufacturing and 22% are going to increase their investments in the field of research and development. However, not all region entries are successful. It is far from surprising that most of the failures happen in Russia and Ukraine.
The elaboration on the regional statistics uncovered most of the major CEE challenges and pinpointed the fundamental differences between CEE and MNC´s domicile or markets where they have been operating so far. The survey of Boston Consulting Group identified these major challenges:
1. A need to organize for a business growth of 30-200% p.a.
2. Manage for ultra subscale markets
3. Operate on assumptions with little data available
4. Build around lacking infrastructure (which cannot meet headquarters standards) 5. Manage around the lack of talent
6. Large cultural distance
These observations are based on objective figures available in the World Bank database and via Economic Intelligence Unit data provider.
24 World bank report. Press search. 2006. http://www.worldbank.org/
25Organizing for global advantage in China, India and other rapidly developing economies. Boston Consulting Group, 2006
http://iisdb.stanford.edu/evnts/4326/Organizing_for_Global_Advantage_in_China_India_and_Other_Rapidly_D eveloping_Economies_Mar06.pdf
43 5.1.1. A need to organize for a business growth of 30-200% p.a.
The markets of former European Union (EU-15) are regardless the industry considered stable and in most cases also saturated. Any economic turbulence or significant changes in consumers´ preferences are rare and market growth is mostly negligible thinking in global scale. The situation is considerably different in the CEE region. In some industries e.g.
banking the market growth in CEE exceeds the growth in Western Europe manifold. This can be demonstrated using the data for home credits. As the chart below shows, some individual markets or segments achieve much higher rates of growth than those in Western Europe or in other developed markets. The difference is in order of magnitudes. It is not an exception that the slowest growing CEE market (in this case it is Croatia) equals the fastest growing in EU 15 (Greece). The extreme values are evidently much higher as well (3x more than EU 15 average).
Exhibit 14: Consumer Credit Market Development
Source: European Central Bank data warehouse http://sdw.ecb.europa.eu/, National Banks’ reports.
2 5 10 11
11 12 12 13 13 14 14 19 21
26
DE LU FR PT GB DK SE NL IT FI IE AT ES GR
Country 104
87 78 78 74
22
30 30 32 33 42 46
68 71 66
HR PL HU SI BA CZ SK EE LV BG RU LT RO RS UA
CEE EU-15
Annual growth of loans to households(1) (%)
1. Outstanding amounts at the end of a year, CAGR 2003- 2005, for EE, LV a LT CAGR 2004-2006 Note: All data in Euro, for EE, LV and LT in local currencies
Annual growth of loans to households (%)
Average growth:
Average growth:
2 5 10 11
11 12 12 13 13 14 14 19 21
26
DE LU FR PT GB DK SE NL IT FI IE AT ES GR
Country 104
87 78 78 74
22
30 30 32 33 42 46
68 71 66
HR PL HU SI BA CZ SK EE LV BG RU LT RO RS UA
CEE EU-15
Annual growth of loans to households(1) (%)
1. Outstanding amounts at the end of a year, CAGR 2003- 2005, for EE, LV a LT CAGR 2004-2006 Note: All data in Euro, for EE, LV and LT in local currencies
Annual growth of loans to households (%)
Average growth:
Average growth:
44 If a company feels comfortable in its markets which grow at rate of 1-3% annually, then entering CEE might constitute a challenge requiring an individual solution. A slow and/or delayed reaction on market changes can cause a loss in share. Missing of a new trend would have the very same effect. To catch up the growth needs a flexible organizational structure and sufficient capacity to serve such an emerging opportunity.
5.1.2. Manage for ultra subscale markets
The CEE statistical data in their absolute figures demonstrate the undersize of CEE markets.
Even though the average population per country does not divert much from the EU15, it makes a significant difference talking in terms of consumption.
Looking at the example of home credit market again, the total amount of accepted credits varies from 30 up to 1722 billion EUR in the EU 15 countries and it makes only 11 billion EUR in average in the CEE countries.
The next figure illustrates the speed of development and changes in CEE economic environment compared to the one we can observe in the developed countries. The cumulative growth in costs of labor per hour has been chosen as a representative example.
Exhibit 15: Cumulative growth in manufacturing labor costs per hour 2000-2006 (%)
Source: Economic Intelligence Unit data:
http://secure.alacra.com/cgiin/alacraswitchISAPI.dll?app=eiusite&msg=ExecContent&topic=
63
162
207
394
153
Belgium Czech Republic
Romania
Hungary Russia
45 5.1.3. Operate on assumptions with little data available
Companies coming to CEE are confronted with low availability of data. That forces the executives to operate on the basis of assumptions and estimates. Consultants and advisors as well as regular businessmen face difficulties when trying to assume the size of a particular market or some of its elements. The countries which suffer most from the lack of data are Russia and Ukraine. Comparing the CEE region with developed markets, the results are mostly surprising. Say for instance, a detailed spent report per gas station is available in EU-15 countries, with a breakdown between gas and non-gasoline purchases while in Russia there is no information available not even on the number of gas stations in a country. In the USA, detailed credit reports are accessible within 3-5 minutes online with reliable income information, in contrast, no consistent information on person’s income, passport data or place of residence is on hand in Ukraine. In New York, the detailed 20 years term real estate development plan for power infrastructure planning and construction is ready for on-line download, in Moscow, no reliable real estate development plan even exists. The plans can change for up to 1 mln. sq. meters within 1-2 months with increase in power demand up to 30% of existing capacity.
5.1.4. Build around lacking infrastructure
Lack of infrastructure in the region is a problem of two dimensions. Firstly, the insufficient density of roads and railways bring about higher operating costs. The road network density measured as km/1000sq.km in CEE region is 57% lower than in the Western Europe26. The incremental costs are related to longer distances that trucks have to cover, their faster deterioration and the amount of time consumed. The unsatisfactory density and quality of
26 www.siteresources.worldbank.org
46 roads prolong the delivery time of goods from the plant to final customer and thus limits the producer’s flexibility.
Secondly, it can considerably push up the investment costs as well. Even though most of the infrastructure facilities in CEE are owned and operated by the public sector with little commercial orientation and weak incentives for cost recovery, in some countries the local government orders investors to build up the infrastructure network around its business (most common in shopping zones project). It has a great impact on financing of the project and its overall feasibility.
5.1.5. Manage around the lack of talent
The question of talent is gaining in its importance nowadays. The older generation of managers grew up under the communist regime and it is very difficult to adapt themselves to the new conditions and new managerial methods. The younger generation misses the necessary experience to lead and manage even though they have studied at best business schools around the world. The data from telecom industry show that the average CEO’s experience in telecommunications is 39 years for the top three companies in the USA but only 4 years in Russia. Contrary to that, the compensation packages for top managers are threefold higher in Russia than those in the USA.
Managing around lack of talent involves not only higher costs but also longer time spent when looking for the proper people. To staff the open position in executive and middle management often requires double of the length of time needed in Western countries.
Companies setting up business in CEE should take these factors into account when lining up the project plan.
5.1.6. Large cultural distance
The 50 years of communist regime ruling cross the region in the second half of the 20th century negatively influenced people’s minds and behaviour. The mismanagement of
47 resources and the failure to provide a satisfying standard of living for its people factored into the eventual collapse of communism but its marks and traces persisted till now and can be observed also 20 years after the regime’s breakdown. Even though, the multinational corporations acknowledge the potential of the new emerging economies. Unfortunately, a lack of management education, training, and organizational knowledge, as well as, the difficulty in cultivating an efficient and productive workforce with post-communist cultural baggage impede the company’s eastern internationalization. The long-lasting suppressive communist regime did not encourage development of such virtues as quality-consciousness, self-reliance, and work ethic. Identifying successful management practices capable of motivating the workforce in CEE will facilitate the development of effective business ventures, creating appeal and accessibility for foreign investment; thus, resulting in a better standard of living for local people. Effective human resource management and workforce development must consist of practices knowledgeable of cross-cultural differences.